united states court of appeals for the first circuit...

UNITED STATES COURT OF APPEALS FOR THE FIRST CIRCUIT

No. 15-1080

JOHN P. FLANNERY, Petitioner,

v. SECURITIES AND EXCHANGE COMMISSION,

Respondent.

No. 15-1117

JAMES D. HOPKINS, Petitioner,


Respondent.

On Petition for Review of an Order of the Securities and Exchange Commission

BRIEF OF THE SECURITIES AND EXCHANGE COMMISSION, RESPONDENT

MICHAEL A. CONLEY Deputy General Counsel

JOHN W. AVERY Deputy Solicitor

BENJAMIN L. SCHIFFRIN Senior Litigation Counsel

LISA K. HELVIN Senior Counsel

Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549-9040 (202) 551-5195 (Helvin)

Case: 15-1080 Document: 00116863170 Page: 1 Date Filed: 07/15/2015 Entry ID: 5922977

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TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES .................................................................................... iv

COUNTERSTATEMENT OF THE ISSUES ............................................................ 1

COUNTERSTATEMENT OF THE CASE ............................................................... 2

A. Nature of the Case ................................................................................. 2

B. Facts ....................................................................................................... 3

1. LDBF........................................................................................... 3

2. Hopkins ....................................................................................... 4

a. Typical Portfolio Slide ...................................................... 4

b. Hopkins’s presentation of the Typical Portfolio Slide to Yanni Partners and National Jewish Medical and Research Center on May 10, 2007 ................................... 5

c. Yanni Partners’s discovery of LDBF’s actual ABS exposure ............................................................................ 7

3. Flannery ...................................................................................... 8

a. The July 25, 2007 SSgA Investment Committee meeting and subsequent liquidation of LDBF’s highest-rated securities ..................................................... 8

b. Investor redemptions ...................................................... 10

c. August 2 and August 14, 2007 letters to investors ......... 11

C. Proceedings Below .............................................................................. 13

SUMMARY OF THE ARGUMENT ...................................................................... 14


TABLE OF CONTENTS (Continued) Page

ii

ARGUMENT ........................................................................................................... 16

I. Substantial evidence supports the Commission’s determinations that Hopkins and Flannery are liable for violating the securities laws. ............... 16

A. Substantial evidence supports the Commission’s determination that Hopkins is liable for presenting the Typical Portfolio Slide at the May 10, 2007 meeting with National Jewish. ........................... 17

1. The Typical Portfolio Slide was false and misleading. ............ 17

2. The misrepresentation in the slide was material. ...................... 19

3. Hopkins acted with scienter. ..................................................... 23

4. Hopkins “made” the misrepresentation in the Typical Portfolio Slide during his May 10, 2007 presentation. ............. 27

B. Substantial evidence supports the Commission’s determination that, by helping to draft, edit, and approve two misleading letters sent to investors, Flannery violated Section 17(a)(3) of the Securities Act. ..................................................................................... 33

1. The August 2 and August 14 letters were misleading.. ............ 33

2. The misrepresentations in the letters were material.. ............... 40

3. Flannery acted negligently. ....................................................... 45

4. Flannery’s misconduct constituted a course of business that operated as a fraud or deceit on LDBF investors. ............. 50

II. The Commission’s interpretation of Section 17(a)(3) is correct and, in any event, reflects a reasonable exercise of the Commission’s statutory authority to administer Section 17(a) of the Securities Act. .......... 52

III. Application of the Commission’s interpretation of Section 17(a)(3) does not contravene principles of fair notice or the rule of lenity. ................ 57

A. Flannery did not lack fair notice of Section 17(a)(3)’s prohibitions. . 57


TABLE OF CONTENTS (Continued) Page

iii

B. The rule of lenity is inapplicable. ........................................................ 60

IV. The Commission properly exercised its discretion when sanctioning Flannery. ........................................................................................................ 62

CONCLUSION ........................................................................................................ 63

CERTIFICATE OF COMPLIANCE

CERTIFICATE OF SERVICE


iv

TABLE OF AUTHORITIES

Cases Page

Aaron v. SEC, 446 U.S. 680 (1980) ............................................................. 16, 54, 55

Abramski v. United States, 134 S. Ct. 2259 (2014) ........................................... 60, 61

Aldridge v. A.T. Cross Corp., 284 F.3d 72 (1st Cir. 2002) ...................................... 25

Barber v. Thomas, 560 U.S. 474 (2010) .................................................................. 60

Basic Inc. v. Levinson, 485 U.S. 224 (1988) ..................................................... 43, 44

Broadrick v. Oklahoma, 413 U.S. 601 (1973) ......................................................... 59

Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) ........................................................................................... 56, 57

City of Arlington v. FCC, 133 S.Ct. 1863 (2013) .............................................. 52, 56

Cody v. SEC, 693 F.3d 251 (1st Cir. 2012) ............................................................. 16

Conn v. Colvin, No. 14-cv-05698, 2015 WL 2089368 (W.D. Wash. May 5, 2015) ...................................................................................... 30

Dolphin & Bradbury, Inc. v. SEC, 512 F.3d 634 (D.C. Cir. 2008) ......................... 21

FCC v. Fox Television Stations, Inc., 132 S. Ct. 2307 (2012) ................................ 59

Geffon v. Micrion Corp., 249 F.3d 29 (1st Cir. 2001) ............................................. 25

Grigsby v. CMI Corp., 765 F.2d 1369 (9th Cir. 1985) ............................................ 42

Howard v. SEC, 376 F.3d 1136 (D.C. Cir. 2004) .................................................... 47

In re Bear Stearns Sec., Derivative, & ERISA Litig., 763 F. Supp. 2d 423 (S.D.N.Y. 2011) ....................................................................................................... 22

In re MBIA, Inc., Sec. Litig., 700 F. Supp. 2d 566 (S.D.N.Y. 2010) ....................... 19


TABLE OF AUTHORITIES (Continued) Page

v

In re MoneyGram Int’l, Inc. Sec. Litig., 626 F. Supp. 2d 947 (D. Minn. 2009) ....................................................................................................... 19

Janus Capital Grp., Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011) ....... 28

Markowski v. SEC, 34 F.3d 99 (2d Cir. 1994) ......................................................... 46

Milton v. Van Dorn Co., 961 F.2d 965 (1st Cir. 1992) ............................................ 42

Moskal v. United States, 498 U.S. 103 (1990) ......................................................... 61

Muscarello v. United States, 524 U.S. 125 (1998) .................................................. 60

N.J. Carpenters Health Fund v. Royal Bank of Scotland, 709 F.3d 109 (2d Cir. 2013) ........................................................................................................... 20

Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund, 135 S. Ct. 1318 (2015) ............................................................................................. 37

P. Gioioso & Sons, Inc. v. Occupational Safety & Health Review Comm’n, 675 F.3d 66 (1st Cir. 2012) ...................................................................................... 52

Perez-Olivo v. Chavez, 394 F.3d 45 (1st Cir. 2005) ................................................ 61

Pittsburgh Coke & Chem. Co. v. Bollo, 560 F.2d 1089 (2d Cir. 1977) ................... 42

Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 632 F.3d 762 (1st Cir. 2011) ......................................................................... 38

Puerto Rico Aqueduct & Sewer Auth. v. EPA, 35 F.3d 600 (1st Cir. 1994) ............ 33

Rizek v. SEC, 215 F.3d 157 (1st Cir. 2000) ............................................................. 62

SEC v. Banc of Am. Mortg. Sec., Inc., No. 13-cv-00447, 2014 WL 2778498 (W.D.N.C. June 19, 2014) ....................................................................................... 58

SEC v. Dain Rauscher, Inc., 254 F.3d 852 (9th Cir. 2001) ..................................... 45

SEC v. Ficken, 546 F.3d 45 (1st Cir. 2008) ................................................. 16, 23, 27



vi

SEC v. Goldsworthy, No. 06-10012, 2008 WL 8901272 (D. Mass. June 11, 2008) ................................................................................... 55, 58

SEC v. Hughes Capital Corp., 124 F.3d 449 (3d Cir. 1997) ................................... 45

SEC v. Koenig, 557 F.3d 736 (7th Cir. 2009) .......................................................... 23

SEC v. Melchior, No. 90-c-1024J, 1993 WL 89141 (D. Utah Jan. 14, 1993) ......... 58

SEC v. Morgan Keegan & Co., 678 F.3d 1233 (11th Cir. 2012) .......... 20, 21, 42, 43

SEC v. Mudd, 885 F. Supp. 2d 654 (S.D.N.Y. 2012) ........................................ 19, 22

SEC v. Seghers, No. 04-cv-1320, 2006 WL 2661138 (N.D.Tex. Sept. 14, 2006) ........................................................................................ 58

SEC v. Shanahan, 646 F.3d 536 (8th Cir. 2011) ..................................................... 48

SEC v. Steadman, 967 F.2d 636 (D.C. Cir. 1992) ................................................... 47

SEC v. Stoker, 873 F. Supp. 2d 605 (S.D.N.Y. 2012) ............................................. 56

SEC v. Tambone, 597 F.3d 436 (1st Cir. 2010) ....................................................... 57

SEC v. Texas Gulf Sulpher Co., 401 F.2d 833 (2d Cir. 1968) ................................. 17

SEC v. Zandford, 535 U.S. 813 (2002) .............................................................. 52, 56

Shideler v. Astrue, 688 F.3d 306 (7th Cir. 2012) ..................................................... 30

Smith & Wesson Holding Corp. Sec. Litig., 669 F.3d 68 (1st Cir. 2012) ................ 19

Soto-Hernandez v. Holder, 729 F.3d 1 (1st Cir. 2013) ............................................ 61

Stier v. Smith, 473 F.2d 1205 (5th Cir. 1973) .................................................... 43, 45

Suburban Air Freight, Inc. v. TSA, 716 F.3d 679 (D.C. Cir. 2013) ........................ 57

Swaters v. Osmus, 568 F.3d 1315 (11th Cir. 2009) ................................................. 33



vii

Thomas v. Duralite Co., 524 F.2d 577 (3d Cir. 1975) ............................................. 42

Titan Grp. v. Faggen, 513 F.2d 234 (2d Cir. 1975) ................................................ 42

TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976) ........................................ 19

United States v. Fernandez, 722 F.3d 1 (1st Cir. 2013) .......................................... 60

United States v. Hahn, 17 F.3d 502 (1st Cir. 1994) ................................................. 30

United States v. Jimenez, 507 F.3d 13 (1st Cir. 2007) ............................................. 60

United States v. Jones, 57 F.3d 1020 (11th Cir. 1995) ............................................ 53

United States v. King, 560 F.2d 122 (2d Cir. 1977) ................................................ 47

United States v. Mead Corp., 533 U.S. 218 (2001) ........................................... 52, 56

United States v. Naftalin, 441 U.S. 768 (1979) ................................................. 54, 55

United States v. Norman, 776 F.3d 67 (2d Cir. 2015) ............................................. 32

Upton v. SEC, 75 F.3d 92 (2d Cir. 1996) ................................................................. 59

Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991) ............................... 19

Weiss v. SEC, 468 F.3d 849 (D.C. Cir. 2006) .......................................................... 58

Statutes and Rules

Securities Act of 1933, 15 U.S.C. §§ 77a, et seq.

Section 8A, 15 U.S.C. § 77h-1 ...................................................................... 52

Section 17(a), 15 U.S.C. § 77q(a)...........................................................passim

Section 17(a)(1), 15 U.S.C. § 77q(a)(1) .................................................passim

Section 17(a)(2), 15 U.S.C. § 77q(a)(2) ............................................ 53, 54, 55

Section 17(a)(3), 15 U.S.C. § 77q(a)(3) .................................................passim



viii

Section 24, 15 U.S.C. § 77x .......................................................................... 60

Securities Exchange Act of 1934, 15 U.S.C. §§ 78a, et seq.

Section 10(b), 15 U.S.C. § 78j(b) .................................................. 2, 13, 14, 16

5 U.S.C. § 706(2)(A) ................................................................................................ 16

Commission Rules

Exchange Act Rule 10b-5, 17 C.F.R. § 240.10b-5 .................................passim

Exchange Act Rule 10b-5(a), 17 C.F.R. § 240.10b-5(a) ........................passim

Exchange Act Rule 10b-5(b), 17 C.F.R. § 240.10b-5(b) .......................passim

Exchange Act Rule 10b-5(c), 17 C.F.R. § 240.10b-5(c) ........................passim

Commission Decisions

Anthony Fields, Securities Act Release No. 9727, 2015 WL 728005 (Feb. 20, 2015) ......................................................................................................... 58

Byron G. Borgardt, 56 S.E.C. 999, 2003 WL 22016313 (Aug. 25, 2003) .............. 58

Cady, Roberts & Co., 40 S.E.C. 907, 1961 WL 60638 (Nov. 8, 1961) .................. 55

Francis V. Lorenzo, Securities Act Release No. 9762, 2015 WL 1927763 (Apr. 29, 2015) ......................................................................................................... 29

Fundamental Portfolio Advisors, Inc., 56 S.E.C. 651, 2003 WL 21658248 (July 15, 2003) ......................................................................................................... 23

Johnny Clifton, Securities Act Release No. 9417, 2013 WL 3487076 (July 12, 2013) ......................................................................................................... 58

Nat’l P’ship Invs. Corp., Securities Act Release No. 7425, 1997 WL 349021 (June 25, 1997) ......................................................................................................... 58



ix

Piper Capital Mgmt., Inc., 56 S.E.C. 1033, 2003 WL 22016298 (Aug. 26, 2003) ........................................................................................................ 58

Ralph Calabro, Jason Konner, & Dimitrios Koutsoubos, Securities Act Release No. 9798, 2015 WL 3439152 (May 29, 2015) ........................................... 29

Steven E. Muth & Richard J. Rouse, 58 S.E.C. 770, 2005 WL 2428336 (Oct. 3, 2005) ........................................................................................................... 32

Other Authorities

Webster’s New Int’l Dictionary (2d ed. 1934) ........................................................ 53

Flannery Post-Hearing Reply Br., John P. Flannery & James D. Hopkins, File No. 3-14081 (May 6, 2011), available at https://www.sec.gov/litigation/apdocuments/3-14081-event-88.pdf ...................... 41


UNITED STATES COURT OF APPEALS FOR THE FIRST CIRCUIT

No. 15-1080

JOHN P. FLANNERY, Petitioner,


Respondent.

No. 15-1117

JAMES D. HOPKINS, Petitioner,


Respondent.

On Petition for Review of an Order of the Securities and Exchange Commission

BRIEF OF THE SECURITIES AND EXCHANGE COMMISSION, RESPONDENT

COUNTERSTATEMENT OF THE ISSUES

James D. Hopkins, a former vice president and product engineer for State

Street Global Advisors (“SSgA”), and John P. (“Sean”) Flannery, a former Chief

Investment Officer (“CIO”) for the Americas at SSgA, petition for review of an

order of the Securities and Exchange Commission finding that they violated the

federal securities laws. The issues presented are:


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1. Whether substantial evidence supports the Commission’s findings that

(a) Hopkins violated Section 17(a)(1) of the Securities Act of 1933 (“Securities

Act”), 15 U.S.C. § 77q(a)(1), Section 10(b) of the Exchange Act of 1934

(“Exchange Act”), 15 U.S.C. § 78j(b), and Exchange Act Rule 10b-5, 17 C.F.R.

§ 240.10b-5, by presenting materially misleading information at a meeting with

investors; and (b) Flannery violated Securities Act Section 17(a)(3), 15 U.S.C.

§ 77q(a)(3), by helping to draft, edit, and approve two misleading letters to

investors.

2. Whether the Commission reasonably interpreted Section 17(a)(3)’s

prohibition against fraudulent practices and courses of business to encompass

misrepresentations used to mislead investors.

3. Whether the Commission’s finding that Flannery violated Section

17(a)(3) contravenes principles of fair notice or the rule of lenity.

4. Whether the Commission acted within its discretion in imposing a

one-year suspension, cease-and-desist order, and $6,500 penalty on Flannery.

COUNTERSTATEMENT OF THE CASE

A. Nature of the Case

The Commission found that Hopkins violated the antifraud provisions of the

securities laws by misrepresenting material facts about State Street Bank and Trust

Company’s (“State Street’s”) Limited Duration Bond Fund (“LDBF”), an


3

unregistered fixed-income fund, during a meeting with investors and consultants in

May 2007. ADD85-92.1 The Commission found that Flannery engaged in a

course of business that operated as a fraud on investors by helping to draft, edit,

and approve two misleading letters about LDBF in August 2007. ADD97-107.

For their misconduct, the Commission suspended Hopkins and Flannery for one

year from association with any investment adviser or investment company,

imposed cease-and-desist orders on them, and ordered that they pay civil penalties.

ADD109-16.

B. Facts

1. LDBF

In 2006 and 2007, SSgA, State Street’s investment management division,

provided management and advisory services to State Street funds, including

LDBF. ADD61; JA990, 2929. LDBF was offered and sold to institutional

investors. ADD61; JA805, 1482, 4363-65. Those investors included other State

Street Funds (the “Related Funds”), clients of SSgA’s internal advisory groups,

and investors who were unaffiliated with either the Related Funds or the internal

advisory groups. ADD62; JA524, 805, 1012-19, 1240-42.

From its inception in 2002, LDBF was heavily invested in asset-backed

securities (“ABS”), a significant component of which were residential mortgage-

1 “ADD” refers to Flannery’s addendum.


4

backed securities (“RMBS”). ADD61; JA4361-62. Over time, the fund became

increasingly concentrated in subprime RMBS. ADD61; JA1195-96, 1803-10.

2. Hopkins

Hopkins was LDBF’s “product engineer”; he was responsible for explaining

to client-facing personnel—and, often, investors—LDBF’s investment strategy.

ADD62; JA798, 804, 808, 864. Hopkins also was responsible for ensuring the

accuracy of SSgA’s standard PowerPoint slides that he and others used in investor

presentations. ADD62-63; JA836, 843, 916.

a. Typical Portfolio Slide

In 2006 and 2007, SSgA’s standard presentation included a slide describing

LDBF’s “Typical Portfolio Exposures and Characteristics” (the “Typical Portfolio

Slide”). ADD62-63; JA836, 4413. The slide described the fund’s “typical”

breakdown by sector, stating in part that LDBF was only 55% invested in ABS,

even when the fund’s exposure to ABS far exceeded that level. Compare, e.g.,

JA2425, 4413 (slide as presented) with JA1803-10, 2425 (actual investment level).

Throughout that time period, when asked if he wanted to update the standard

presentation slides, and when reviewing them for accuracy, Hopkins consistently

declined to update the sector allocation information in the Typical Portfolio Slide.

JA836-44, 847-48, 4413.


5

Nevertheless, when preparing for investor meetings, Hopkins noted by hand

on his copy of the Typical Portfolio Slide LDBF’s actual sector allocations,

including its actual exposure to ABS. JA832-40; e.g., JA1725, 1885, 2062.2 But

he did not distribute his notes to meeting attendees, and there is no evidence that

Hopkins otherwise corrected the inaccurate information about LDBF’s ABS

exposure during his presentations. See JA832-48, 916-17.

b. Hopkins’s presentation of the Typical Portfolio Slide to Yanni Partners and National Jewish Medical and Research Center on May 10, 2007

In late 2006, home prices declined, and delinquencies and defaults in the

subprime mortgage sector followed; as a result, in February 2007, LDBF suffered a

serious decline in performance, much of which was attributable to its exposure to

the lower-rated tranches of subprime RMBS. ADD64; JA1103, 1468, 1513, 2064-

77.

On May 10, 2007, Hopkins gave a presentation to National Jewish Medical

and Research Center (“National Jewish”) to address LDBF’s first-quarter losses

arising from its exposure to subprime RMBS. ADD65; JA833, 925, 1413-16.

Meeting attendees included representatives from Yanni Partners, an investment

2 Before a July 2006 presentation, Hopkins noted on his copy of the Typical Portfolio Slide that 90% of LDBF’s assets were in ABS (JA836, 1714-61); before a December 2006 presentation, Hopkins noted that 80% of LDBF was in ABS (JA837, 1869-1915); and before a February 2007 presentation, Hopkins noted that 90% of LDBF was in ABS (JA838, 2055-63).


6

consulting firm that advised several institutions—including National Jewish—that

invested in SSgA’s Enhanced Dow Jones-AIG Commodities Index Fund (the

“Commodities Fund”), which itself invested in LDBF. ADD65; JA581. Before

the meeting, National Jewish was provided with SSgA’s presentation materials,

including the Typical Portfolio Slide. JA4391-4432.

Although Hopkins did not recall what he said during the meeting, another

meeting attendee, David Hammerstein, did. JA834-35, 857-59, 945-46, 1413-15.

According to Hammerstein, the chief strategist for Yanni Partners (JA1407-08),

Hopkins specifically addressed the Typical Portfolio Slide during the presentation

to demonstrate that LDBF “was very high quality” and “very diversified by

sector.” JA1414-15. Hammerstein testified that, in total, SSgA’s presentation

lasted for about thirty minutes, that Hopkins did most of the talking and appeared

to have finished his presentation, and that Hopkins did not appear rushed. JA1413-

14. Hammerstein also testified that he understood from Hopkins’s presentation

that LDBF’s portfolio was allocated according to the percentages listed in the slide

(i.e., 55% in ABS). JA1414-15, 4413. Hammerstein stated that he found the

information about LDBF’s portfolio allocation important because “[i]t led to the

impression that the fund was well diversified, and therefore that State Street took

steps to reduce the risks or control the risks.” JA1415. Contrary to the information


7

in the slide, however, at that time LDBF’s exposure to ABS was at least 75%. See

JA847-48, 4544.

c. Yanni Partners’s discovery of LDBF’s actual ABS exposure

By July 2007, credit downgrades of investments backed by subprime

mortgages had created a market-wide liquidity crisis. ADD66; JA4858-61, 4897.

As a result, LDBF experienced another round of significant losses; in late July,

SSgA held a conference call with Yanni Partners to address the issue. JA1415,

2312-14, 4823-26. Hammerstein testified that it was only during that call that he

learned that LDBF’s actual exposure to ABS exceeded that described in the

Typical Portfolio Slide—that it had been 100% as of March 31, 2007, and was

82% as of June 30, 2007. JA1416; see also JA2312-14, 2424-25.

Hammerstein’s testimony—that, as of late July 2007, Yanni Partners

realized that it had been “led to believe” inaccurate information about LDBF

(JA1417)—is corroborated by a contemporaneously drafted Yanni Partners

memorandum stating that LDBF “was much less diversified than” the May 10

presentation had indicated. JA2313-14 (noting also that the July call “was the first

time” Yanni Partners had “learned that the entire [fund] was exposed to the sub-

prime market as recently as 3/31/07”); see also JA4924 (minutes from August 2,

2007 Yanni Partners Investment Policy Meeting noting that SSgA had not “fully


8

disclos[ed]” information about its portfolio and that SSgA presentation materials

“suggest[ed] a much more diversified strategy than was actually being employed”).

On August 3, 2007, Yanni Partners recommended that its clients liquidate

their holdings in SSgA’s Commodities Fund (which was invested in LDBF).

JA1417, 2386, 4924. Hammerstein testified that Yanni Partners made this

recommendation because it believed that SSgA had not “adequately inform[ed] us

of the risks in the portfolio, and we cited the example of the [May 10] presentation

. . . [where] State Street stated that . . . the typical allocation was 55 percent to the

ABS sector, but as recently as March 31 of 2007, the actual ABS allocation was

100 percent.” JA1417. Hammerstein also stated that his clients suffered a loss of

nearly 40% by investing in LDBF through the Commodities Fund. JA1419.

3. Flannery

Flannery was the CIO for the Americas at SSgA. ADD67; JA803, 991,

2223. He reported directly to SSgA’s President and CEO, and SSgA’s portfolio

managers (including the manager responsible for LDBF) reported indirectly to

him. ADD67; JA803, 990-92, 2223.

a. The July 25, 2007 SSgA Investment Committee meeting and subsequent liquidation of LDBF’s highest-rated securities

As the subprime crisis deepened in the Summer of 2007, SSgA anticipated

that many investors would seek redemptions from LDBF. ADD67; JA1040, 1046.


9

This was the subject of the July 25, 2007 meeting of the SSgA Investment

Committee. JA1046-49, 1114-16, 2317-21. Flannery, who chaired the meeting,

explained to attendees that the “overriding issue” they faced was how “to provide

liquidity” by the end of July “if our clients want to leave the fund.” JA1046, 2317-

21. He observed that liquidity could be acquired in one of two ways: (1) sell just

LDBF’s most liquid assets, its AAA-rated bonds, which, if the anticipated

redemptions occurred, would leave the fund “stuck with a lower quality portfolio”

after the sale; or (2) sell a “pro-rata share” of assets across the portfolio, which,

after redemptions, would “leave[] the remaining portfolio more like a pro-rata

share.” JA2320. Out of concern that LDBF could “end up with a less liquid” and

lower value portfolio, Flannery advised that the committee should adopt the second

(pro rata) approach. JA2318-21.

Others also acknowledged that the first approach—selling just the most

highly rated securities—would, after redemptions, leave clients remaining in

LDBF “with riskier lower grade” investments. JA2318. Indeed, one attendee even

asked whether authorizing any sales at all would expose committee members “to

fiduciary risk.” JA2319. Another responded, “if no money moves (comes in or

out)”—i.e., if no redemptions occur—“then no; but if a client withdraws we will

need to revalue the portfolio.” JA2319. Mark Duggan, SSgA’s Deputy General

Counsel, also observed that the “wors[t] case scenario” would be if SSgA’s


10

Related Funds redeemed from LDBF and remaining “clients in the fund . . .

suffer[ed].” JA2320.

Ultimately, the committee instructed the portfolio management team to build

30 to 40% liquidity in LDBF by the end of July. JA2321, 1213-16, 1234-35.

Accordingly, on July 26 and 27, the portfolio management team sold many of

LDBF’s highest-rated, and most liquid, assets—approximately $1.6 billion in

AAA-rated bonds and $200 million in AA-rated bonds. JA972, 2761-64, 4322-24.

b. Investor redemptions

As the Investment Committee anticipated, many of LDBF’s investors

redeemed their investments in LDBF. JA3841-42, 2761-64. State Street’s Related

Funds redeemed essentially all of their investments, and several of SSgA’s internal

advisory groups recommended that their clients redeem, as well. See JA1014-17,

1243-48, 1392-93, 4066-80. On July 27, the head of one of those groups informed

Flannery that she would advise her clients to liquidate by August 1. JA1014-16,

1247-48, 2636-40. By August 1, Flannery learned that another group had also

recommended that its clients redeem. JA1017-18, 2349-63, 4066-80. Those

redemptions, as well as redemptions by the Related Funds, began on July 27.

JA2761-64, 3842-45. Many of the other, independent, LDBF investors did not

receive advice recommending that they redeem, however, and thus they remained

in the fund. See JA4944, 3842, 3846.


11

By August 2, all but between $175 million and $195 million of the proceeds

from the July 26-27 sales had been used, in part to cover the investor redemptions.

See JA972-73, 4322-24; FlanneryBr.18.3 As a result, from July 26 to August 2,

LDBF’s portfolio composition changed substantially—from approximately 48%

invested in AAA-rated securities to less than 5%, and from approximately 46%

invested in AA-rated securities to over 80%. JA1214, 2764.

c. August 2 and August 14, 2007 letters to investors

In late July, SSgA executives began drafting a letter to investors about the

effects of the subprime mortgage crisis on “SSgA’s active fixed income and active

derivative-based strategies,” including LDBF (the “August 2 letter”). JA2346-48,

2375-80. After receiving an early draft, Flannery edited the last paragraph of the

letter, which addressed the “risk profile[s]” of SSgA’s funds. JA2364-67. In its

final form, that paragraph stated, in relevant part:

[T]he downdraft in valuations has had a significant impact on the risk profile of our portfolios, prompting us to take steps to seek to reduce risk across the affected portfolios. To date, in the Limited Duration Bond Strategy, we have reduced a significant portion of our BBB-rated securities and we have sold a significant amount of our AAA-rated cash positions. . . . The actions we have taken to date in the Limited Duration Bond Strategy simultaneously reduced risk in other SSgA active fixed income and active derivative-based strategies.

3 Approximately $1.1 billion of the proceeds was used to repay reverse repurchase commitments on the sold securities. JA972-73, 4322-24. LDBF had purchased the bonds using reverse repurchase agreements and had to unwind those agreements as part of its sale of the bonds. JA4339-40.


12

JA2375-80. Flannery reviewed a near-final version of the letter on or around

August 2, 2007. JA1062, 1473, 2429-32.

Shortly thereafter, in early August, Flannery drafted and signed another

letter to investors addressing the market decline and LDBF’s continued poor

performance (the “August 14 letter”). As Flannery testified, given “the seriousness

of the problems with LDBF and the related funds,” he believed that investors

should hear from him directly. JA1066, 1139. His initial draft stated, in part:

While we believe that the subprime markets clearly convey far greater risk than they have historically we feel that forced selling in this chaotic and illiquid market is unwise. . . . [W]e believe that liquidity will slowly re-enter the market and the segment will regain its footing. While we will continue to liquidate assets for our clients when they demand it, our advice is to hold the positions for now.

JA2434.

Both in-house and outside counsel reviewed Flannery’s draft. JA1070-71,

1139-40, 2436-40. In its final form, the letter incorporated an edit from Duggan,

who suggested that the final sentence quoted above be changed to read: “While we

will continue to liquidate assets for our clients when they demand it, we believe

that many judicious investors will hold the positions in anticipation of greater

liquidity in the months to come.” JA2440, 2474-81. Flannery testified that he

accepted the proposed edit because he believed the revised language remained

“accurate”; in his view, it “didn’t materially change” the recommendation that

investors remain in LDBF. JA1143-44, 1070-71. The letter did not disclose to its


13

recipients that SSgA’s internal advisory group clients and the Related Funds were

redeeming (and had largely already redeemed) their shares. JA1250.

C. Proceedings Below

Following an evidentiary hearing, at which Hopkins, Flannery, and

Hammerstein (among others) testified, an ALJ found that Hopkins and Flannery

did not violate the antifraud provisions of the securities laws. ADD1-58.

On its de novo review of the record, the Commission determined that

Hopkins violated Section 17(a)(1), Section 10(b), and Rule 10b-5 by presenting the

Typical Portfolio Slide at his meeting with National Jewish on May 10, 2007.

ADD85-92. The Commission found Hopkins not liable with respect to all of the

other allegations. ADD85, 92-97. As to Flannery, the Commission found that the

August 2 and August 14, 2007 letters misled LDBF investors and that by helping

to draft, edit, and approve the letters, Flannery engaged in a course of business that

operated as a fraud on investors in violation of Section 17(a)(3). ADD98-107.

The Commission found Flannery not liable with respect to the other allegations.

ADD98-107.

The Commission suspended both Hopkins and Flannery for one year from

association with any investment adviser or investment company, imposed cease-

and-desist orders on them, and assessed a civil penalty of $65,000 on Hopkins and

$6,500 on Flannery. ADD109-16.


14

SUMMARY OF ARGUMENT

Substantial evidence supports the Commission’s findings that Hopkins and

Flannery violated the securities laws. Hopkins made a materially misleading

misrepresentation when presenting the Typical Portfolio Slide at his meeting with

National Jewish on May 10, 2007. The slide misrepresented LDBF’s portfolio

composition because, by 2006, the fund’s exposure to ABS far exceeded the 55%

investment level depicted in the slide, and reasonable investors would have wanted

to know that LDBF’s exposure to ABS was substantially higher than the slide

represented. Hopkins acted with scienter because he knew at the time that the slide

provided inaccurate information about LDBF, and he recklessly disregarded the

risk that presenting the slide would mislead investors about LDBF’s portfolio

allocation. Accordingly, the Commission correctly found that, by presenting the

slide, Hopkins violated Securities Act Section 17(a), Exchange Act Section 10(b),

and Exchange Act Rule 10b-5(a), (b), and (c).

Flannery engaged in a course of business that operated as a fraud on LDBF

investors by negligently helping to draft, edit, and approve two letters to investors

that contained materially misleading statements. The August 2 letter misled

investors because it stated that the sale of LDBF’s AAA-rated bonds reduced

LDBF’s risk, when in fact the sale, coupled with the anticipated immediate

investor redemptions, increased the fund’s risk. The August 14 letter misleadingly


15

stated that “judicious investors” would remain in LDBF, even though SSgA-

affiliated investors were actually redeeming their shares and had done so by the

time the letter was distributed. As the Commission found, reasonable investors

would have wanted to know the truth about LDBF’s risk and that SSgA’s own

funds and advisory groups were exiting (or advising their clients to exit) the fund.

Flannery acted negligently because he unreasonably failed to correct the letters

despite knowing facts that made them misleading. Because Flannery’s repeated

conduct occurred over a two-week period and encompassed more than one

materially misleading communication, the Commission correctly found that he

engaged in a course of business that operated as a fraud on LDBF investors in

violation of Section 17(a)(3).

The Commission’s interpretation of Section 17(a)(3)—specifically its

reading of the provision to encompass misstatements and misstatement-related

conduct—is correct because it follows directly from the statutory text, and, in any

event, it deserves deference because it is reasonable. The Commission’s

application of its interpretation to Flannery also does not contravene either

principles of fair notice or the rule of lenity. And the sanctions the Commission

imposed on Flannery for violating Section 17(a)(3) were within the Commission’s

discretion.


16

ARGUMENT

I. Substantial evidence supports the Commission’s determinations that Hopkins and Flannery are liable for violating the securities laws.

Securities Act Section 17(a), Exchange Act Section 10(b), and Exchange

Act Rule 10b-5, all prohibit fraud in securities transactions. Section 17(a)(1) and

Rule 10b-5(a) both prohibit the use of “any device, scheme, or artifice to defraud.”

15 U.S.C. § 77q(a)(1); 17 C.F.R. § 240.10b-5(a). Rule 10b-5(b) prohibits

“mak[ing] any untrue statement of a material fact.” 17 C.F.R. § 240.10b-5(b).

Rule 10b-5(c) prohibits “engag[ing] in any act, practice, or course of business

which operates or would operate as a fraud or deceit.” 17 C.F.R. § 240.10b-5(c).

And Section 17(a)(3) contains language similar to Rule 10b-5(c), substituting

“transaction” for “act.” 15 U.S.C. § 77q(a)(3). Proof of scienter is required to

establish violations of Rule 10b-5 and Section 17(a)(1); a showing of negligence is

sufficient to establish liability under Section 17(a)(3). See Aaron v. SEC, 446 U.S.

680, 697 (1980); SEC v. Ficken, 546 F.3d 45, 47 (1st Cir. 2008).

On a petition for review, the Commission’s “factual findings control if

supported by substantial evidence.” Cody v. SEC, 693 F.3d 251, 257 (1st Cir.

2012); see also 5 U.S.C. § 706(2)(A) (the Commission’s legal conclusions must

not be “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance

with law”). Here, substantial evidence supports the Commission’s determination

that Hopkins violated Section 17(a)(1) and Rule 10b-5(a), (b), and (c) when, with


17

scienter, he materially misrepresented LDBF’s portfolio holdings by presenting the

Typical Portfolio Slide at the May 10, 2007 meeting with National Jewish.

Substantial evidence also supports the Commission’s determination that Flannery

violated Section 17(a)(3) by negligently helping to draft, edit, and approve two

misleading letters sent to LDBF investors in August 2007.

A. Substantial evidence supports the Commission’s determination that Hopkins is liable for presenting the Typical Portfolio Slide at the May 10, 2007 meeting with National Jewish.

When Hopkins misrepresented LDBF’s exposure to ABS at his meeting with

National Jewish, he made a material misrepresentation in violation of Rule 10b-

5(b), employed a device or artifice to defraud in violation of Section 17(a)(1) and

Rule 10b-5(a), and engaged in an act that operated as a fraud on investors in

violation of Rule 10b-5(c).

1. The Typical Portfolio Slide was false and misleading.

A statement is misleading if it would convey to a reasonable investor “a

false impression.” SEC v. Texas Gulf Sulpher Co., 401 F.2d 833, 862 (2d Cir.

1968) (en banc). Here, substantial evidence supports the Commission’s finding

that the Typical Portfolio Slide misrepresented LDBF’s “typical” exposure to ABS

and thus was misleading to LDBF investors. The slide stated that LDBF’s

“typical” ABS exposure was 55% (JA4413), but by 2006 LDBF’s investment in


18

ABS far exceeded that level (JA1803-10, 2424-25 (68.5% in September 2006;

85.7% in December 2006; 100% in March 2007; and 81.3% in June 2007)).

Hopkins suggests that the Typical Portfolio Slide was not false or misleading

because it showed only LDBF’s “typical”—rather than “actual”—sector allocation.

HopkinsBr.32. But the Commission correctly rejected this argument. ADD85. In

no way did the slide depict LDBF’s “typical” exposure to ABS in 2006 and 2007.

Indeed, Hopkins himself admitted during the hearing that even if at one time

LDBF’s “typical” investment in ABS was 55%, by 2006 that figure was no longer

“typical.” JA843-44. Also, the record shows that Hammerstein, who attended the

May 10, 2007 meeting, was misled about LDBF’s portfolio by the Typical

Portfolio Slide. JA1414-15. Hammerstein testified that, based on Hopkins’s

presentation of the slide, he understood that LDBF was “allocate[ed] among

sectors based on these percentages,” including “55 percent ABS.” JA1414-15.

Hopkins also argues that, notwithstanding its inaccuracy, the slide was not

misleading because SSgA disseminated “accurate data about LDBF’s actual

composition ‘by sector’ across this time period.” HopkinsBr.32-33. But the

slide’s statement about LDBF’s “typical” investment was itself false and

misleading, regardless of any other information SSgA may have disseminated. As

the Supreme Court has stated, publishing true facts alongside false ones may

render a misstatement immaterial but it will not “lose its deceptive edge simply by


19

joinder with others that are true.” Virginia Bankshares, Inc. v. Sandberg, 501 U.S.

1083, 1097-98 (1991) (emphasis added). And, as discussed below, SSgA did not

disseminate accurate information about LDBF in a manner sufficient to render the

misstatement in the Typical Portfolio Slide immaterial.

2. The misrepresentation in the slide was material.

A misstatement is material if there is a “substantial likelihood” that “a

reasonable investor would have viewed the [statement] as significantly altering the

total mix of information made available.” Smith & Wesson Holding Corp. Sec.

Litig., 669 F.3d 68, 74 (1st Cir. 2012). Materiality does not require proof that

accurate disclosure would have caused an investor to change his or her decision,

but only that such truthful information “would have assumed actual significance in

[his] deliberations.” TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).

Here, the Commission appropriately concluded that, at the time the

misstatement was made, in 2006 and 2007, reasonable investors would have

deemed it significant to the total mix of information available to them to know that

LDBF’s exposure to ABS was substantially higher than was stated in the slide.

ADD86; accord SEC v. Mudd, 885 F. Supp. 2d 654, 666-67 (S.D.N.Y. 2012)

(allegations of misrepresentations about subprime exposure in February 2007

satisfied materiality pleading requirements); In re MBIA, Inc., Sec. Litig., 700 F.

Supp. 2d 566, 579-81 (S.D.N.Y. 2010); In re MoneyGram Int’l, Inc. Sec. Litig.,


20

626 F. Supp. 2d 947, 975-78 (D. Minn. 2009). Indeed, as Hammerstein testified,

he found the sector allocation information in the slide important because “[i]t led to

the impression that the fund was well diversified.” JA1414-15. And Hopkins

himself testified that SSgA generally regarded information about its portfolio

allocation as sufficiently important that it sought to avoid disclosing it in order to

protect its competitive advantage. JA826.

None of Hopkins’s three arguments for overturning the Commission’s

materiality finding has merit.

1. Hopkins erroneously contends that the slide’s misstatement was

immaterial because accurate information about LDBF’s portfolio composition was

presented in other places, including in SSgA’s “Fact Sheets” about LDBF, which,

he claims, were generally available to investors and consultants. HopkinsBr.43.

The Commission appropriately rejected this argument. ADD87. Where

misrepresentations are made directly to investors, it is no defense to a finding of

materiality to claim that accurate or corrective information was available upon

request or through the investors’ own research efforts. SEC v. Morgan Keegan &

Co., 678 F.3d 1233, 1252-53 (11th Cir. 2012) (rejecting argument that

misrepresentations were immaterial because accurate information was “available to

any ‘reasonably diligent investor’”); N.J. Carpenters Health Fund v. Royal Bank of


21

Scotland, 709 F.3d 109, 127 (2d Cir. 2013); Dolphin & Bradbury, Inc. v. SEC, 512

F.3d 634, 641 (D.C. Cir. 2008).

That rule holds especially true where, as here, any corrective information is

not widely distributed to investors. Morgan Keegan, 678 F.3d at 1253. Indeed,

Hopkins identifies no more than three instances in which the Fact Sheets were

actually sent to investors or consultants. HopkinsBr.5, 32; see also JA812, 1587

(January 2006); JA814-15, 1916 (January 2007); JA864 (June 2007). Moreover,

during the hearing, Hopkins’s own attorney asserted that “[t]here has not been any

testimony in this case” showing that the Fact Sheets were “typically distributed” to

SSgA clients. JA1552. And Hopkins himself testified that SSgA did not generally

provide clients with information about portfolio holdings because it would “give

competitors an idea of how we’re doing what we’re doing.” JA826. Thus, the

record contradicts Hopkins’s assertion that the Fact Sheets adequately “disclosed,

on a regular basis, the actual composition of LDBF’s portfolio.” HopkinsBr.43.4

2. There is likewise no merit to Hopkins’s argument that the

Commission erred by using hindsight to find his misstatement material.

HopkinsBr.41-42, 48. In fact, the Commission explicitly rejected the notion that

4 Hopkins also cites no evidence that Yanni Partners or National Jewish ever received corrective information. And although Hopkins’s attorney questioned Hammerstein at length about the May 10, 2007 meeting, he never asked Hammerstein whether Yanni Partners or National Jewish received such information. See JA1458-63.


22

the misstatement in the Typical Portfolio Slide became material “only after the

financial crisis hit in July 2007.” ADD86. Instead, it found that misrepresenting

LDBF’s exposure to ABS was material to investors at the time the misstatement

was made. ADD86. Courts have made similar determinations. E.g., Mudd, 885 F.

Supp. 2d at 666-67; see also In re Bear Stearns Sec., Derivative, & ERISA Litig.,

763 F. Supp. 2d 423, 487 (S.D.N.Y. 2011) (collecting cases holding that “[t]he

incantation of fraud-by-hindsight will not defeat an allegation of

misrepresentations and omissions that were misleading and false at the time they

were made”).

3. Finally, Hopkins misconstrues the Commission’s analysis when he

argues that the Commission held that only misrepresentations about portfolio

composition that affect a fund’s risk profile are material (and, he asserts, LDBF’s

higher exposure to ABS did not do that). HopkinsBr.44-45. The Commission did

not premise its finding of materiality on LDBF’s risk profile. Rather, the

Commission appropriately concluded that the slide’s misrepresentation was

material because reasonable investors would have deemed it important to the total

mix of information to know that LDBF’s “typical” investment in ABS far

exceeded the 55% level the slide depicted. ADD86-87.

To be sure, the Commission cited a case in which it made a “similar[]”

finding that a change in a fund’s composition was material because there the fund’s


23

risk profile increased. ADD86 (citing Fundamental Portfolio Advisors, Inc., 56

S.E.C. 651, 2003 WL 21658248 (July 15, 2003), aff’d sub nom. Brofman v. SEC,

167 F. App’x 836 (2d Cir. 2006)). But the Commission never suggested that only

such changes are material. Rather, it reasonably determined that investors also

would have wanted to know that LDBF’s exposure to ABS was substantially

higher than the slide stated. ADD86.

3. Hopkins acted with scienter.

Substantial evidence supports the Commission’s finding that Hopkins acted

with scienter when he made the misstatement in the Typical Portfolio Slide. This

Court has held that “proving scienter requires a showing of either conscious intent

to defraud or a high degree of recklessness.” Ficken, 546 F.3d at 47 (internal

quotation marks omitted). Recklessness is “an extreme departure from the

standards of ordinary care . . . [that] presents a danger of misleading buyers or

sellers that is either known to the defendant or is so obvious the actor must have

been aware of it.” Id. (internal quotation marks omitted). Hopkins mistakenly

asserts that, to establish scienter, the Division also was required to show “a motive

to mislead.” HopkinsBr.51-52. That is incorrect. “The plaintiff in a securities

fraud suit must show intentional deceit; the motive for that deceit is beside the

point.” SEC v. Koenig, 557 F.3d 736, 740 (7th Cir. 2009).


24

As the Commission found here, Hopkins’s admissions during testimony and

his contemporaneous notes establish that he must have known the slide was

inaccurate as it was provided to investors and consultants in 2006 and 2007. See

ADD90-91. Hopkins testified that, by 2006, the sector allocations described in the

slide were no longer “typical” of LDBF’s actual allocations. JA843-44. He also

testified that, as of May 2007, the slide “was not accurate as an actual description

of the [LDBF] portfolio,” as the fund was “primarily” invested in ABS. JA847.

Hopkins’s handwritten notes on his copies of the slide further demonstrate that, by

May 2007, he knew that LDBF’s ABS exposure far exceeded 55%. See supra note

2. It was thus perfectly reasonable for the Commission to conclude that “this

evidence shows that Hopkins must have known that the Typical Portfolio Slide

would mislead LDBF investors, and he recklessly disregarded that fact.” ADD90.

Hopkins’s three arguments for overturning that finding are unpersuasive.

1. Hopkins argues that he lacked scienter because the Commission’s

evidence “may show that [he] knew ‘typical was not actual,’ but this does not

mean he knew the Slide would deceive investors.” HopkinsBr.53. On the

contrary, Hopkins’s knowledge that “typical was not actual” is strong

circumstantial evidence of his scienter. This Court has found “classic evidence of

scienter” to be “the fact that the defendants published statements when they knew

facts suggesting the statements were inaccurate or misleadingly incomplete.”


25

Aldridge v. A.T. Cross Corp., 284 F.3d 72, 83 (1st Cir. 2002). Similarly, it has

held that “[e]vidence . . . relevant to the scienter issue includes . . . disregard of

current factual information acquired prior to the statement at issue.” Geffon v.

Micrion Corp., 249 F.3d 29, 36 (1st Cir. 2001).

2. The evidence also belies Hopkins’s claim that he lacked scienter

because he did not know (or recklessly disregard) that investors would have found

the misstatement about LDBF’s sector allocations material. HopkinsBr.54-60.

Hopkins plainly considered information about LDBF’s actual portfolio

composition sufficiently important that he made note of it before his presentations.

See supra note 2. Hopkins also testified that he made these notes because he

believed investors might ask him questions on the subject and he wanted to have

“accurate information” available. JA845. In addition, Hopkins received—and

responded to—requests from consultants, investors, and client-facing personnel for

updated information about LDBF’s ABS exposure before the May 2007 meeting.

See JA825-26, 1852-59 (November 2006); JA855, 2771 (April 2007); see also

JA2226-28 (June 2007); JA860, 924, 2233-37 (June 2007); JA867, 2290 (July

2007). As the Commission explained, these communications demonstrate that

Hopkins “must have appreciated that the information was important to LDBF

investors.” ADD90. And all of this evidence shows that, as the Commission

found, Hopkins knew—at the time, and not merely in “hindsight,” as he claims—


26

that obtaining accurate sector allocation information was important to LDBF

investors.

Hopkins erroneously asserts that the Commission’s reliance on his

handwritten notes means that every time he noted something and failed to say it at

a presentation, he “thereby exposed himself to liability.” HopkinsBr.57-58. The

Commission did not base liability on Hopkins’s failure to disclose his handwritten

notes; it found him liable for providing false sector allocation information in the

Typical Portfolio Slide. Hopkins’s notes simply indicate that he knew both that

information about sector allocations was important and that the information in the

slide was not accurate.

Hopkins also faults the Commission for relying on his responses to inquiries

about LDBF’s portfolio composition, asserting that he responded to only one such

inquiry before the meeting with National Jewish. But the record establishes that he

responded to at least two such inquiries before May 10, 2007: On November 10,

2006, Hopkins emailed LDBF’s portfolio allocation to an SSgA client-facing

person expressing hope that the information “will satisfy your client” (JA825-26,

1852-59); and on April 25, 2007 (two weeks before the National Jewish meeting),

Hopkins told LDBF’s portfolio manager that he had recently responded to a

question from a consulting firm about LDBF’s portfolio allocation (JA855, 2771).

In light of this evidence, it was reasonable for the Commission to conclude that


27

Hopkins must have appreciated the significance of the sector allocation

information.

3. Finally, Hopkins misconstrues the relevant scienter inquiry by arguing

that, in 2006 and 2007, he was unaware of any “danger” associated with LDBF’s

investments and thus necessarily lacked scienter. HopkinsBr.60-61. The relevant

question, however, is not whether an individual foresaw market-wide “dangers”

resulting in investment losses, but rather whether his own conduct presented an

obvious “danger” of misleading investors. Ficken, 546 F.3d at 47-48. Here, as

discussed, the record shows that: the Typical Portfolio Slide misrepresented

LDBF’s investment in ABS; Hopkins was aware of that misrepresentation; and, as

Hopkins was aware, LDBF’s sector allocation was important to LDBF investors.

That is sufficient to establish—as the Commission found—that Hopkins’s

presentation of the misstatement in the Typical Portfolio Slide posed such an

obvious danger of misleading LDBF investors that he, as an experienced securities

professional, must have been aware of it. See ADD90-91.

4. Hopkins “made” the misrepresentation in the Typical Portfolio Slide during his May 10, 2007 presentation.

The Commission found Hopkins liable under Rule 10b-5(b) for the material

misstatement in the Typical Portfolio Slide because he, with scienter, “made” the


28

misstatement.5 “[T]he maker of a statement is the person or entity with ultimate

authority over the statement, including its content and whether and how to

communicate it.” Janus Capital Grp., Inc. v. First Derivative Traders, 131 S. Ct.

2296, 2302 (2011). Substantial evidence supports the Commission’s finding.

As the Commission explained, Hammerstein testified that Hopkins presented

the slide during the May 10, 2007 meeting. ADD91; JA1414-15. Hammerstein

testified that Hopkins used the slide to demonstrate that LDBF “was very high

quality”; “[Hopkins] said it was very diversified by sector and he provided . . . a

typical breakdown by sector.” JA1414-15; see JA4413. Hammerstein testified

further that he understood, based on Hopkins’s presentation, that LDBF was “55

percent ABS” and that the slide gave “the impression that the fund was well

diversified.” JA1415; see also JA2386-88, 2413-15, 2424-25. Hammerstein

testified that Hopkins did most of the talking during the 30-minute presentation,

did not appear rushed, and finished his presentation. JA1413-14.

As the Commission noted, the ALJ “found Hammerstein to be a credible

witness.” ADD91 n.126; ADD47 n.78. The Commission “give[s] considerable

weight to the credibility determination of a law judge since it is based on hearing

5 The Commission concluded that because Hopkins made a material misstatement with scienter in violation of Rule 10b-5(b), he also employed a device or artifice to defraud in violation of Section 17(a)(1) and Rule 10b-5(a) and engaged in an act that operated or would operate as a fraud or deceit in violation of Rule 10b-5(c). ADD92.


29

the witnesses’ testimony and observing their demeanor.” Ralph Calabro, Jason

Konner, & Dimitrios Koutsoubos, Securities Act Release No. 9798, 2015 WL

3439152, at *10 (May 29, 2015); see also Francis V. Lorenzo, Securities Act

Release No. 9762, 2015 WL 1927763, at *10 n.32 (Apr. 29, 2015) (the

Commission does not accept credibility determinations “blindly”). Accordingly,

the Commission appropriately credited Hammerstein’s testimony that Hopkins had

presented the Typical Portfolio Slide at the May 10 meeting. ADD91 n.126. But

the Commission also found (ADD91) that additional record evidence supported

Hammerstein’s account: Hopkins was responsible for ensuring the accuracy of the

information in the Typical Portfolio Slide (JA836, 843); Hopkins was consistently

named as one of the lead presenters on the cover of presentations containing the

slide (JA832, 916-17); and Hopkins regularly made handwritten notes on the slide

in preparation for his presentations, indicating that he was generally responsible for

delivering the portion of the presentation encompassing that material (JA832-33,

837-40, 916-17; supra note 2). From this evidence, the Commission reasonably

concluded that Hopkins had ultimate authority over the misstatement in the Typical

Portfolio Slide, at least with respect to the May 10, 2007 presentation. See

ADD91-92.

Hopkins contends that the Commission erred in finding that he presented the

Typical Portfolio Slide at the National Jewish meeting because, he claims, the


30

Commission improperly credited and relied on Hammerstein’s testimony and then

impermissibly shifted the burden of proof to Hopkins to present “compelling”

evidence to overcome Hammerstein’s account. HopkinsBr.20-31. His arguments

lack merit.

1. Hopkins contends, first, that the ALJ was required to credit each of

Hammerstein’s statements individually—and that without such individualized

credibility determinations, the ALJ’s overall assessment that Hammerstein was

credible (ADD47 n.78) is meaningless. HopkinsBr.23-25. He cites no authority

for his position, however, and in fact courts have rejected that argument,

explaining that “[a]n ALJ is not required to assess the credibility of every

statement uttered by a [witness], because the ALJ’s determination need not apply

to particular, individual statements, but rather addresses the credibility of a

[witness’s] testimony overall.” Conn v. Colvin, No. 14-cv-05698, 2015 WL

2089368, at *4 (W.D. Wash. May 5, 2015) (slip op.); accord Shideler v. Astrue,

688 F.3d 306, 312 (7th Cir. 2012).

Hopkins next suggests that even if Hammerstein’s testimony can be

believed, that testimony alone is insufficient to support the determination that he

presented the Typical Portfolio Slide. HopkinsBr.25. But this Court has

recognized that a witness’s credible testimony that an event occurred is sufficient

to support a finding that in fact such event took place. United States v. Hahn, 17


31

F.3d 502, 508 (1st Cir. 1994). And Hopkins errs in claiming that Hammerstein’s

testimony was somehow deficient because it was “uncorroborated.”

HopkinsBr.26. In fact, as discussed above, the record supports Hammerstein’s

account: It shows that Hopkins was generally responsible for the information in the

Typical Portfolio Slide and gave the presentation about LDBF at the meeting with

National Jewish.

Hopkins insists, however, that it undermines Hammerstein’s testimony that

much of the additional evidence about the National Jewish meeting is silent as to

whether the Typical Portfolio Slide was presented or who presented it. See

JA4435 (Hopkins’s co-presenter’s meeting notes); JA2091-92 (Hammerstein’s

meeting notes); JA4439-41 (National Jewish’s Investment Committee minutes).

But while there is no direct evidence that corroborates Hammerstein’s account,

there is certainly no evidence—direct or circumstantial—that contradicts it.

Similarly, it does not diminish the veracity of Hammerstein’s recollection of the

meeting that his memory needed to be refreshed on other subjects. See

HopkinsBr.27-28; JA1459 (Hammerstein, stating that he “clearly remember[ed]”

the May 10 meeting).6 Therefore, because Hopkins cannot identify evidence that

6 Hopkins also suggests that because the ALJ found that Hammerstein may have been confused as to certain statements Hopkins made in April 2007, it was improper for the Commission to rely on his account of the May 10 meeting. HopkinsBr.24-25. But the “genuine confusion” as to the financial data discussed


32

actually contradicts Hammerstein’s account, and because he cannot show that the

Commission erred in crediting Hammerstein’s testimony, the Commission’s

finding should be upheld. See United States v. Norman, 776 F.3d 67, 79 (2d Cir.

2015) (direct testimonial evidence need not be corroborated by documentary

evidence in order to be credited).

2. Hopkins incorrectly asserts that the Commission “got the law wrong”

and misapplied “its own precedent” by requiring him to present “compelling,”

rather than “substantial,” evidence to overcome Hammerstein’s testimony.

HopkinsBr.22. But when stating that it found “no compelling evidence” to

contradict Hammerstein’s account, the Commission was not purporting to

articulate the legal standard required to overcome a credibility determination;

rather, it was noting Hopkins’s failure to present any evidence that he did not

present the slide at the May 10 meeting. See ADD91, 92. This observation hardly

constitutes the legal error that Hopkins suggests.

Moreover, the Commission and courts alike have described their approach to

evaluating credibility assessments using precisely the language Hopkins

challenges. E.g., Steven E. Muth & Richard J. Rouse, 58 S.E.C. 770, 2005 WL

2428336, at *14 (Oct. 3, 2005) (“[W]e do not overturn credibility findings of the

fact finder absent compelling evidence to the contrary.” (emphasis added));

in April 2007 (ADD48, 96) has no bearing on Hammerstein’s testimony that Hopkins presented the slide at the May 10 meeting.


33

Swaters v. Osmus, 568 F.3d 1315, 1324 (11th Cir. 2009) (agency appropriately

found that respondent had shown “no compelling reason . . . to overturn” ALJ

credibility determination). And although the Commission has also characterized

the evidence needed to overturn credibility findings as “substantial,” an agency

need not “invariably . . . parrot the same phrases or perpetually chant the same

mantra.” Puerto Rico Aqueduct & Sewer Auth. v. EPA, 35 F.3d 600, 609 (1st Cir.

1994).

B. Substantial evidence supports the Commission’s determination that, by helping to draft, edit, and approve two misleading letters sent to investors, Flannery violated Section 17(a)(3) of the Securities Act.

Flannery engaged in a course of business that operated as a fraud on LDBF

investors in violation of Section 17(a)(3) because, as a result of his negligent

conduct, SSgA sent investors two letters that materially misled them about the

nature of their investment in LDBF.

1. The August 2 and August 14 letters were misleading.

Substantial evidence supports the Commission’s finding that the August 2

and August 14 letters “misleadingly downplayed LDBF’s risk and encouraged

investors to hold onto their shares, even though SSgA’s own funds and internal

advisory group clients were fleeing the fund.” ADD98. As the Commission

explained, the “backdrop” for these misleading communications was the July 25,

2007 Investment Committee meeting, at which attendees discussed how to provide


34

liquidity if investors wanted to leave LDBF. ADD68, 97-98; JA1114-16, 2317-21.

At that meeting, Flannery acknowledged that, if SSgA sold LDBF’s AAA-rated

bonds “and the cash raised from the sale was ‘siphoned’ by redemptions (as they

expected it to be) LDBF would be ‘stuck with a lower quality portfolio’ that was

‘less liquid’ and ‘valued less.’” ADD68, 99; JA2318-21. Other attendees raised

similar concerns. JA2318-21. Nonetheless, on July 26 and 27, SSgA sold from

LDBF approximately $1.6 billion in AAA-rated bonds. JA972, 4322-24, 2761-64.

And, by August 2, as Flannery was aware, SSgA’s internal advisory groups had

recommended that their clients redeem their positions in LDBF (JA1014-17, 1247-

48, 2636-40, 2349-63), and the sale proceeds were being used to cover investor

redemptions by the internal advisory group clients and the Related Funds (JA3842-

45).

In light of these facts, the Commission reasonably found it misleading to

state in the August 2 letter that the sale of the AAA-rated bonds had reduced

LDBF’s risk, and to state in the August 14 letter that SSgA believed judicious

investors would continue to hold LDBF. The August 2 letter was misleading

because, as the Commission explained, SSgA “never intended to hold cash or

equivalent securities” after the sale of the AAA-rated bonds; instead, SSgA “sold

the AAA-rated securities to fund expected redemptions in LDBF.” ADD99-100.

As a result, LDBF’s sale of the AAA-rated securities “did not reduce risk in the


35

fund” because, as Flannery and others at the July 25 meeting anticipated, “the

securities that remained in the fund had a lower credit rating and were less liquid

than those that were sold.” ADD99. The August 14 letter was misleading because,

as the Commission stated, “it suggested that SSgA viewed holding onto the LDBF

investment as a ‘judicious’ decision when, in fact, officials at SSgA had taken a

contrary view, redeeming SSgA’s own shares in LDBF and advising SSgA

advisory group clients to redeem their interests, as well.” ADD100.

Flannery’s challenges to the Commission’s determinations lack merit.

1. With respect to the August 2 letter, Flannery asserts that the letter was

accurate because it described the steps SSgA had taken “to seek to reduce risk”

and, he claims, there is “no evidence that the transactions were not intended to

reduce risk.” FlanneryBr.36-37. But Flannery ignores the last sentence of the

letter, which stated, in part, that the “actions we have taken to date in [LDBF]

simultaneously reduced risk in other SSgA active fixed income and active

derivative-based strategies.” JA2379-80. As the Commission found, the letter as a

whole “explains that SSgA sought to reduce LDBF’s risk profile” and it asserts

that SSgA in fact “reduced that risk, in part, by selling ‘a significant amount’ of its

‘AAA-rated cash positions.’” ADD99 (emphasis added); JA2379-80.

Flannery also asserts that, in any event, the sale of the AAA-rated bonds

“did reduce risk” because, as his expert witness Ezra Zask testified, it reduced


36

LDBF’s exposure to risky subprime securities and reduced leverage.

FlanneryBr.37. But Zask did not account for the purpose of the sale. As the

Commission found, his testimony “assumed that the net proceeds of the sale would

be held in cash or cash-equivalent securities, which are less risky than” subprime

securities. ADD99; JA4340-44, 1369, 1371-72. Zask ignored the fact that SSgA

sold the AAA-rated bonds not so as to hold the cash, but to pay expected

redemptions, which it did. See JA4340-44, 1369, 1371-72. The Commission thus

reasonably concluded that Zask’s testimony did not establish that the sale reduced

risk. ADD100; see also JA1238-39 (LDBF’s portfolio manager explaining that

when cash is drawn down to cover redemptions, risk increases).

Flannery asserts further that the Commission was “wrong” to say that the

redemptions from LDBF meant that the sale of the AAA-rated bonds increased

LDBF’s risk because, according to him, “approximately half the cash raised in the

AAA sale remained in LDBF on August 2.” FlanneryBr.37, 18. But Flannery

himself admits that LDBF sold $1.54 billion of AAA bonds and there was only

$175-$195 million left by August 2 after investor redemptions. FlanneryBr.16, 18;

ADD68. Flannery claims that this amount was “nearly half” of the proceeds from

the sale of the AAA bonds because LDBF retained only $420 million of the $1.54

billion after repaying repurchase commitments on the securities sold.

FlanneryBr.18. But the fact that the cash from the sale of the AAA bonds was


37

largely exhausted both by repaying repurchase commitments and by investor

redemptions is irrelevant; the point is that LDBF sold its highest-rated assets and

did not retain the proceeds of the sale. The sale of the AAA bonds thus increased

LDBF’s risk because, as expected, investor redemptions began immediately

afterwards (JA3842-45), and as Flannery and others foresaw at the July 25

Investment Committee Meeting, without the cash from the sale, LDBF was “stuck

with a lower quality portfolio” that was “less liquid” and “valued less.” JA2318-

21.7

2. With respect to the August 14 letter, Flannery contends that the

statement “we believe many judicious investors will hold the positions” is “not

actionable” because it is an opinion he believed. FlanneryBr.40. In Omnicare,

Inc. v. Laborers Dist. Council Const. Indus. Pension Fund, the Supreme Court held

that a statement of opinion may be misleading, and thus actionable, if it “omits

material facts about the issuer’s inquiry into or knowledge concerning” the opinion

because an investor “expects not just that the [speaker] believes the opinion . . . but

that it fairly aligns with the information in [his] possession at the time.” 135 S. Ct.

1318, 1328-29 (2015). This Court too has recognized that an opinion “may still be

7 The Commission did not “disregard[] the risk reduction resulting from the other two transactions identified in the letter” (FlanneryBr.38); it noted that even if these other transactions reduced risk, “the August 2 letter still would have been misleading because it represented that each of the stated actions reduced risk.” ADD100 n.145.


38

misleading if it . . . knowingly omits undisclosed facts tending seriously to

undermine the accuracy of the statement.” Plumbers’ Union Local No. 12 Pension

Fund v. Nomura Asset Acceptance Corp., 632 F.3d 762, 775 (1st Cir. 2011). Here,

the August 14 letter failed to disclose, as Flannery knew, that judicious investors

such as the Related Funds and internal advisory group clients were exiting the

fund.

Flannery also erroneously argues that the statement was accurate because it

“did not say that Flannery believed ‘all’ judicious investors would remain

invested” but rather “that ‘many’ would.” FlanneryBr.41. But as the Commission

explained, “the reference to ‘many,’ not ‘all,’ investors hardly constitutes an

accurate disclosure given that the letter omits any recognition that Flannery knew

that many ‘judicious investors’ (SSgA itself, as well as clients advised by SSgA)

actually planned to exit (and had already exited) the fund.” ADD101.

Flannery argues further that the statement was accurate because many

Related Funds “were taking redemptions in-kind, and thus remained invested in the

LDBF strategy” and “exposed to the same assets they had been exposed to in

LDBF.” FlanneryBr.41-42. But, as the Commission found, that “some investors

redeemed in-kind for the ‘assets in LDBF’s strategy’ . . . does not establish that

‘judicious investors’ wanted to hold onto shares of LDBF itself.” ADD101.

Contrary to what Flannery asserts (Br.42), this distinction is meaningful because


39

investors in LDBF faced a daily risk that other shareholders would redeem and

siphon liquidity from the fund. Indeed, Flannery himself recognized this problem

when he created LDBF II, a fund that followed the same investment strategy as

LDBF but permitted redemptions to occur only monthly. JA1120. The letter’s

suggestion that judicious investors would hold their positions in LDBF itself was

therefore misleading; it did not state that such investors would want to hold onto

assets in “LDBF’s strategy.”8

Finally, Flannery contends that the statement was not misleading because

“the August 6 letter announcing LDBF II disclosed that the Related Funds were

redeeming in-kind” and thus investors “were well aware of significant redemptions

from LDBF before August 14.” FlanneryBr.42. As discussed below, however, the

disclosure in the August 6 letter was inadequate. The letter disclosed only that

“[c]ertain SSgA” internal advisory groups “intend[ed] to redeem in-kind” their

shares in LDBF—not that those groups and the Related Funds had already

redeemed a large portion of their LDBF holdings for cash. See JA4139-42.

8 Flannery suggests that the letter’s reference to “hold[ing] positions” conveyed that investors should remain in LDBF’s assets, not LDBF itself. FlanneryBr.42. But no reasonable investor would interpret this statement to mean that they should in fact sell LDBF only to then buy LDBF’s underlying assets.


40

2. The misrepresentations in the letters were material.

The Commission found that the misleading statements in the August 2 and

August 14 letters were material because the total mix of information would have

been altered had the letters disclosed the ultimate impact of the sale of the AAA-

rated bonds on LDBF’s risk profile, or that SSgA’s own funds and SSgA-advised

investors fled the fund in late July and early August. ADD102. Flannery

challenges the Commission’s finding on the ground that it discounted both the

availability of information from other sources and the sophistication of LDBF’s

investors. FlanneryBr.52-53. But he fails to establish that the statements were

immaterial.

1. Flannery argues that the Commission ignored that information about

“liquidity issues” and redemptions was available to investors from other sources.

But he does not explain how any other document alerted investors that—contrary

to the representation in the August 2 letter—the sale of the AAA-rated bonds

ultimately increased risk.

As for the August 14 letter, none of the documents Flannery highlights

establishes that investors knew about the undisclosed redemption activity. The

statement in the August 14 letter that SSgA would “continue to liquidate assets for

[its] clients” who demanded it (FlanneryBr.53) did not, as the Commission found,

constitute a disclosure about the nature or magnitude of the SSgA-driven


41

redemptions that had already occurred. ADD102. Similarly, the July 26 letter

purportedly disclosing “liquidity issues and market turmoil” (FlanneryBr.52) says

nothing about SSgA-driven redemptions. See JA4514-16. And the statement in

the August 6 letter about anticipated in-kind redemptions (FlanneryBr.53) did not

disclose that SSgA’s internal advisory group clients or the Related Funds had

already redeemed large positions for cash. See JA4139-42. Moreover, the in-kind

redemptions did not begin until after large cash redemptions had taken place (see

JA2715-18, 2746-52), and at least some of the in-kind redemptions took place on

days that LDBF did not have sufficient cash to cover them. Compare Flannery

Post-Hearing Reply Br. at 11, John P. Flannery & James D. Hopkins, File No. 3-

14081 (May 6, 2011), available at https://www.sec.gov/litigation/apdocuments/3-

14081-event-88.pdf (recognizing that LDBF had less than $300 million in cash on

August 2 and 3) with JA2717 (two in-kind transactions on August 3 totaled

approximately $300 million). A reasonable investor would have wanted to know

that SSgA-driven redemption activity had already begun and that in-kind

redemptions began only after redemptions for cash had occurred.

Finally, even if SSgA-driven redemption activity were included in FAQs

used to respond to client inquiries (FlanneryBr.52), that is insufficient because, as

discussed above, it is no defense to a finding of materiality to claim that accurate


42

or corrective information was available upon request or through the investors’ own

research efforts. Morgan Keegan, 678 F.3d at 1250-52.

In its amicus curiae brief, the Chamber of Commerce argues that in

“transactions involving a limited number of investors directly interacting with their

counterparties,” the “ready availability of clarifying information” is a defense to a

finding of materiality. ChamberBr.6-9. But the cases it cites for this proposition

all involved misleading communications in the distinguishable context of

negotiating a deal. See Grigsby v. CMI Corp., 765 F.2d 1369, 1372-73 (9th Cir.

1985) (sale of minority shares of subsidiary to parent company); Thomas v.

Duralite Co., 524 F.2d 577, 584 (3d Cir. 1975) (sale of shares in a closely held

corporation from one shareholder to another); Pittsburgh Coke & Chem. Co. v.

Bollo, 560 F.2d 1089, 1091-92 (2d Cir. 1977) (sale of controlling stock in one

company to another company); Titan Grp. v. Faggen, 513 F.2d 234, 239 (2d Cir.

1975) (acquisition by one company of four other companies); Milton v. Van Dorn

Co., 961 F.2d 965, 972 (1st Cir. 1992) (sale of stock of one of company’s

operating division to division’s president).

There is no support for the Chamber’s position that because investors in

LDBF “received their communications either in letters or during in-person

presentations” the hypothetical availability of corrective information had investors

asked for it rendered the misleading statements in those communications


43

immaterial. No case holds that misleading communications about an investment in

a fund are immaterial because investors received the communications in letters or

in-person presentations and corrective information was theoretically available.

Indeed, Morgan Keegan rejects this proposition. 678 F.3d at 1250-52.

As the Commission stated, it would send an “extraordinarily dangerous

message” to hold that a speaker could make a misstatement about LDBF and have

it be considered immaterial so long as he could claim that investors could have

obtained accurate information about the fund had they known to ask. ADD87;

Stier v. Smith, 473 F.2d 1205, 1208 (5th Cir. 1973) (“We should always be wary of

holding that a purchaser of securities, who deals with a corporate insider, could

have found out omitted material facts by examining the corporate books or

undertaking other extensive investigations. [The insiders cannot] excuse

themselves from liability on the basis that they did not provide the right answers

because they were not asked the right questions.”).

2. Flannery also erroneously argues that because Basic Inc. v. Levinson,

485 U.S. 224 (1988), “held that materiality is fact-specific,” and LDBF’s investors

were sophisticated, the Commission erred by not evaluating whether the

misleading statements would be material to a reasonable sophisticated investor.

FlanneryBr.53-54; see also ChamberBr.9. As the Commission recognized

(ADD88), Basic itself found “no authority . . . for varying the standard of


44

materiality depending on” the recipient of “the withheld or misrepresented

information.” 485 U.S. at 240 & n.18. And, in any case, the Commission stated

explicitly that, “even if we were to conduct the sort of materiality analysis

Flannery insists is appropriate, we find that LDBF’s investors still would have

wanted to know the facts that SSgA failed to disclose because those investors (and

the consultants they employed) were not necessarily uniformly knowledgeable

about fixed income investing.” ADD102.

The Chamber nonetheless insists that because LDBF’s investors were

“sophisticated” and “experienced,” the “misleading information identified by the

Commission was simply not significant enough to affect the large volume of

information LDBF’s clients already had available.” ChamberBr.12-13. But it does

so without discussing the facts the Commission found would have altered the total

mix of information. The Chamber does not explain why disclosing that the sale of

the AAA-rated bonds ultimately increased, rather than decreased, risk would not

have been important to sophisticated or experienced investors. Nor does it explain

why sophisticated or experienced investors would not have wanted to know that

SSgA’s internal advisory group clients and the Related Funds were exiting LDBF.

These facts were not disclosed in the August 2 or August 14 letters or elsewhere

and, as the Commission found, sophisticated or experienced investors would have


45

wanted to know them. See Stier, 473 F.2d at 1207 (“[S]ophisticated investors, like

all others, are entitled to the truth[.]”).9

3. Flannery acted negligently.

Substantial evidence supports the Commission’s finding that Flannery “was

negligent with respect to his contributions to and approval of the August 2 and 14

letters.” ADD103. Negligence is the failure to exercise reasonable care,

competence, or prudence. SEC v. Dain Rauscher, Inc., 254 F.3d 852, 857 (9th Cir.

2001); SEC v. Hughes Capital Corp., 124 F.3d 449, 453-54 (3d Cir. 1997). Here,

Flannery failed to meet this standard because he knew facts that made the letters

misleading and yet declined to correct the misleading statements before the letters

were sent to investors.

Flannery acknowledged at the July 25 Investment Committee Meeting that

“if liquidity [were] siphoned” following the sale of the AAA-rated securities,

LDBF would be “stuck with a lower quality portfolio.” JA2320. And he knew

days after the sale that SSgA’s internal advisory groups had recommended that

their clients leave LDBF. JA1014-17, 1247-48, 2349-63, 2636-40. Indeed, the

internal advisory group clients and Related Funds began redeeming immediately

after the sale of the AAA-rated bonds. JA3842-45, 2636-40. Flannery understood,

9 With respect to Hopkins, the Chamber also does not explain why the sophistication of LDBF investors meant that they would not have considered the misrepresentation of LDBF’s ABS holdings in the Typical Portfolio Slide to be important.


46

therefore, that the practical effect of the sales was to impair LDBF’s risk profile.

The Commission thus reasonably concluded that “Flannery’s subsequent approval

of the statement in the August 2 letter that the sales reduced risk thus reflects a

departure from the ‘reasonable care’ he owed LDBF investors.” ADD103. And

Flannery’s representation in the August 14 letter that SSgA believed “judicious

investors” would remain in LDBF, despite his knowledge that SSgA’s internal

advisory groups and the Related Funds were redeeming, “evinces only a further

departure from that standard.” ADD103.

Flannery nonetheless argues that he acted reasonably because he relied on

the advice of counsel and that the Commission erred by deeming counsel’s role

“irrelevant.” FlanneryBr.44. But the Commission did no such thing. It recognized

that “reliance on counsel ‘is not a complete defense, but only one factor for

consideration.’” ADD104 n.156 (quoting Markowski v. SEC, 34 F.3d 99, 105 (2d

Cir. 1994)). And it found that, “even accepting Flannery’s claims that counsel

were heavily involved in the drafting of the letters, that does not make his approval

and/or drafting of the challenged language reasonable under the circumstances.”

ADD104. Whether the “statements were true was not a legal judgment but a

business one—and one that Flannery was well equipped to make.” ADD104.

Flannery “did not have to be an attorney to understand that the sale of the AAA-

rated securities, followed by massive redemptions, ultimately increased LDBF’s


47

risk,” as “he himself made this very observation at the Investment Committee

meeting.” ADD104. Nor did he require legal advice to understand that “‘judicious

investors’ thought it best to exit the fund, as his own colleagues had told him that

they would be advising their clients to redeem their LDBF shares.” ADD104;

JA1014-18, 1247-48, 2349-63.

Flannery contends that, even if the statements in the letters concerned

business judgments, counsel’s role nevertheless demonstrates that Flannery acted

reasonably because he sought counsel’s advice in an effort to make the statements

compliant with the securities laws. FlanneryBr.47. Under this view, a

businessman could never act unreasonably so long as he sought the advice of

counsel. But the presence of counsel does not always preclude negligence. See

Howard v. SEC, 376 F.3d 1136, 1147-49 (D.C. Cir. 2004); SEC v. Steadman, 967

F.2d 636, 642 (D.C. Cir. 1992). Flannery cannot “screen himself by trying to rely

on advice of counsel” where he himself knew the relevant undisclosed facts and

should have known that the representations in the letters were misleading. See

United States v. King, 560 F.2d 122, 132 (2d Cir. 1977). Also, Flannery does not

explain how counsel’s involvement made it reasonable for him, an experienced

securities professional, to draft, edit, and approve the misleading statements in the

letters despite knowing that SSgA’s internal advisory groups and Related Funds

were leaving LDBF. As the Commission stated, “that others (including attorneys)


48

apparently sanctioned the language does not excuse Flannery’s decision to do

so”—he “still should have appreciated that the letter[s were] misleading.”

ADD106.

Flannery’s arguments that he reasonably believed that each letter conveyed

accurate information also necessarily fail in light of the undisclosed facts that he

knew. With respect to the August 2 letter, Flannery contends that the Commission

erroneously “disregarded the role of knowledgeable executives” who believed that

the sale of the AAA bonds reduced risk. FlanneryBr.48-50. To the contrary, the

Commission stated that “even if others were ‘heavily involved’ in its drafting, we

find that those facts . . . do not excuse [Flannery’s] decision to approve misleading

language.” ADD105. As it held, “[r]egardless of what others may have thought,

[Flannery] had an obligation to exercise his own, independent, judgment.”

ADD105. “Depending on others to ensure the accuracy of disclosures to

purchasers and sellers of securities” is “inexcusably negligent.” SEC v. Shanahan,

646 F.3d 536, 544 (8th Cir. 2011). Flannery was an experienced securities

professional who had an obligation to exercise his own reasonable judgment.

Flannery also contends that the Commission’s findings that he made

repeated decisions not to change the misleading language in the letter and

approved it are “unsupported by [the] record.” FlanneryBr.49. But Flannery was

sent a draft of the August 2 letter, edited it, and made no changes to the misleading


49

language (JA2346-48, 2364-67), and he was copied on the final version that was to

be sent to clients (JA2368-69, 2375-80). This was substantial evidence for the

Commission’s conclusion that Flannery made “repeated decisions not to change

the language at issue” that “operated as tacit approval of [the letter’s] contents.”

ADD105. These actions were unreasonable because Flannery knew that the sale of

the AAA bonds, followed by redemptions, “would leave LDBF with a ‘lower

quality portfolio’” and that “the very purpose of the sale was to generate liquidity

for expected redemptions.” ADD103. Flannery “thus should have appreciated

that . . . there was a significant danger that, as drafted, the August 2 letter would

mislead investors.” ADD103.

With respect to the August 14 letter, Flannery argues that his belief that

investors should hold their positions in LDBF was reasonable, given the state of

the market and given that others shared the same view. FlanneryBr.51. But, as the

Commission noted, even “if Flannery himself believed investors should remain

invested in LDBF, the statement refers to SSgA’s belief that investors would do

so.” ADD100. And it was “undisputed that others at SSgA considered LDBF a

poor investment and were exiting the fund.” ADD100. Indeed, Flannery knew “at

the time that SSgA itself and its internal advisory group clients were redeeming

shares in the fund.” ADD105 n.160. And he does not explain how it was


50

reasonable, knowing this, to say that “judicious investors” would remain in the

fund.

Finally, Flannery argues that various SSgA personnel reviewed the August

14 letter and “nobody suggested that the ‘many judicious investors’ language was

misleading or should be changed.” FlanneryBr.50. But as discussed above, that

others reviewed the letter does not mean that Flannery, a senior and experienced

securities professional, acted reasonably. ADD106.

4. Flannery’s misconduct constituted a course of business that operated as a fraud or deceit on LDBF investors.

As the Commission found, Flannery “helped to draft, edit, and approve at

least two letters that had the cumulative effect of misleading LDBF investors about

their investments,” this conduct “spanned a critical two-week period of market

turmoil,” and it “encompassed more than one materially misleading

communication.” ADD106-07. The Commission appropriately found this conduct

“sufficient to hold Flannery liable for having engaged in a ‘course of business’ that

operated as a fraud on LDBF investors” in violation of Section 17(a)(3). ADD107;

15 U.S.C. § 77q(a)(3).

Flannery contends that he cannot be liable under Section 17(a)(3) because,

in his view, the Commission held that Section 17(a)(3) applies only to those “who

repeatedly make[] or draft[] [material] misstatements” and, he asserts, he “did not

‘make’ or draft’ the risk reduction language in the August 2 letter.”


51

FlanneryBr.55. He misreads the Commission’s opinion. The Commission did not

limit liability under Section 17(a)(3) to those who “make” or “draft” a

misstatement. Rather, the Commission sought to explain that such conduct plainly

falls within the purview of Section 17(a)(3). It stated explicitly that Section

17(a)(3) covers “all ‘transaction[s], practice[s], and course[s] of business’ that

‘operate or would operate as a fraud.’” ADD83 (emphasis added). The

Commission identified one such fraudulent practice or course of business as

repeatedly making or drafting material misstatements to investors over a period of

time. ADD84. Another would be, for example, where a defendant’s negligent

misconduct results in investors receiving misleading information. ADD84.

Here, regardless of whether Flannery “drafted” the August 2 and 14 letters,

his actions fall squarely within Section 17(a)(3)’s prohibition on courses of

business that have the effect of misleading investors. As the Commission found, as

a result of the two letters sent over a two-week period that Flannery negligently

drafted, edited, and approved, investors received misleading information about the

nature of their investments in LDBF. See ADD84. Accordingly, he is liable under

Section 17(a)(3).


52

II. The Commission’s interpretation of Section 17(a)(3) is correct and, in any event, reflects a reasonable exercise of the Commission’s statutory authority to administer Section 17(a) of the Securities Act.

While the Commission’s reasonable interpretation of Section 17(a)(3) is

correct as an original matter, it is also entitled to deference. Where, as here,

Congress has authorized an agency to administer a statutory provision through

adjudication (15 U.S.C. § 77h-1), the Supreme Court has instructed that such

authorization is a strong “indicator of delegation meriting” judicial deference.

United States v. Mead Corp., 533 U.S. 218, 229 (2001); City of Arlington v. FCC,

133 S.Ct. 1863, 1874 (2013); see also SEC v. Zandford, 535 U.S. 813, 819-20

(2002) (deferring to the Commission’s interpretation of Exchange Act Section

10(b) in an adjudicatory decision).

When determining whether deference is appropriate in a particular case, a

court asks, first, “whether the statutory text forecloses the agency’s assertion of

authority.” City of Arlington, 133 S. Ct. at 1870-71. If not—if the statute is

“ambiguous with respect to the specific issue,” id. at 1868—the Court “defer[s] to

the agency’s reasonable interpretation,” P. Gioioso & Sons, Inc. v. Occupational

Safety & Health Review Comm’n, 675 F.3d 66, 72 (1st Cir. 2012). Here, the

Commission’s interpretation of Section 17(a)(3) follows directly from—and thus is

neither foreclosed by nor reflects an unreasonable interpretation of—the statutory

text.


53

1. The Commission based its interpretation of Section 17(a)(3) on the

statute’s plain language. As the Commission explained, Section 17(a)(3) prohibits

negligent “practice[s]” and “course[s] of business”—including, but not limited to,

the making, drafting, and dissemination of misstatements—that would operate as a

fraud on investors. ADD83-84; 15 U.S.C. § 77q(a)(3). The ordinary meaning of

the terms “practice” and “course of business” denotes any routine, customary, or

repeated conduct. See Webster’s New Int’l Dictionary 1937 (2d ed. 1934)

(defining “practice” as any “performance or application habitually engaged in” or

“repeated or customary action”); id. at 610 (defining “course,” as used as in

“course of conduct” to mean “a succession of acts or practices”); accord United

States v. Jones, 57 F.3d 1020, 1024 (11th Cir. 1995) (defining “practice” as “the

‘performance or operation of something,’ ‘performance or application habitually

engaged in,’ or ‘repeated or customary action”’).

Flannery’s primary argument to the contrary (Br.59-61) is premised on a

reading of Section 17(a)(2); he does not engage with the text of Section 17(a)(3)

other than to assert that it necessarily excludes any conduct covered by Section

17(a)(2). Indeed, he offers no reason why a series of misstatements would not

constitute a “practice” or “course of business” that could “operate as a fraud” on

investors. Rather, Flannery insists that because only Section 17(a)(2) specifically

references misstatements, all misstatement-related conduct is necessarily the


54

exclusive province of that subsection. FlanneryBr.59-61. But in so arguing, he

misreads the Supreme Court’s decision in United States v. Naftalin, 441 U.S. 768

(1979).

In Naftalin, and then again in Aaron, the Supreme Court explained that each

subsection of Section 17(a) “proscribes a distinct category of misconduct. Each

succeeding prohibition is meant to cover additional kinds of illegalities—not to

narrow the reach of the prior sections.” Naftalin, 441 U.S. at 774; Aaron, 446 U.S.

at 696-97. Flannery seizes on the phrase “distinct category” to assert that the

subsections must be mutually exclusive. But he misses the Court’s point: that the

subsections are successively broader in scope and should not be read to limit one

another. Moreover, Flannery fails to appreciate that his reading of the statute

would cause Section 17(a)(2) to impermissibly “narrow the reach of” Section

17(a)(1)—it would excise from its scope any “device, scheme or artifice to

defraud” involving a misstatement or omission. 15 U.S.C. § 77q(a)(1). That is

precisely what Naftalin and Aaron prohibit.

The Commission’s interpretation of Section 17(a)(3), by contrast, fully

comports with Naftalin and Aaron. Reading Section 17(a)(3) to encompass

negligent misstatements in no way “narrow[s] the reach of the prior sections.”

Naftalin, 441 U.S. at 774. Rather, the Commission’s interpretation enables each

subsection to proscribe “additional kinds of illegalities” not covered by the one


55

before it. Id. It is thus consistent with the statutory structure the Supreme Court

seemed to envision in Aaron: overlapping subsections that become sequentially

broader in scope as they move from scienter-based fraud (Section 17(a)(1)) to non-

scienter-based conduct that does or “would” defraud investors (Sections 17(a)(2)

and (a)(3), respectively). Aaron, 446 U.S. at 696-97.

Flannery argues that such a reading renders Section 17(a)(2) “meaningless.”

FlanneryBr.61. But he also concedes, as he must, that a single negligent

misstatement would not constitute a “practice” or “course of business” and thus

could be charged under only Section 17(a)(2) (provided the defendant obtained

money or property), and not Section 17(a)(3). And, in any event, the Commission

has long held that the subsections of Section 17(a) are “mutually supporting,” not

“mutually exclusive.” Cady, Roberts & Co., 40 S.E.C. 907, 1961 WL 60638, at *4

(Nov. 8, 1961).

2. Although it understood its interpretation to follow largely from the

statute’s plain text, the Commission also recognized that courts have disagreed

about the scope of Section 17(a). ADD70. As to Section 17(a)(3), in particular,

courts have differed as to whether it encompasses liability for negligent

misrepresentations. Compare, e.g., SEC v. Goldsworthy, No. 06-10012, 2008 WL

8901272, at *12 (D. Mass. June 11, 2008) (Section 17(a)(3) claims “were properly


56

predicated upon misstatements”) with SEC v. Stoker, 873 F. Supp. 2d 605, 614

(S.D.N.Y. 2012) (Section 17(a)(3) claims must go “beyond” misrepresentations).

To the extent it too finds the statute ambiguous, this Court should defer to

the Commission’s reasonable interpretation of Section 17(a)(3). As noted, that

Congress provided for a formal adjudicative process for administering the

Securities Act is itself indicative of congressional “delegation meriting Chevron

treatment.” Mead, 533 U.S. at 229-30. And the Supreme Court has, accordingly,

deferred to the Commission’s interpretation in adjudicatory decisions of other

antifraud provisions of the securities laws. Zandford, 535 U.S. at 819-20.

Flannery argues, however, that the Commission’s interpretation of Section

17(a)(3) is not entitled to deference because it “was never argued by the Division”

or “raised by the Commission at oral argument” and thus “is devoid of the

adversarial procedural safeguards required for deference.” FlanneryBr.63-64.

That argument fails because, as the Supreme Court has explained, it is the

formality of the adjudicative process itself—not the nature of the arguments

made—that makes deference to agency decisions appropriate. See City of

Arlington, 133 S.Ct. at 1874; Mead, 533 U.S. at 228-30, 234-38. Merely because

Flannery disagrees with the end result of that process does not mean that deference

is less warranted. Indeed, it would turn on its head the entire justification for

deference—the presumption that statutory ambiguity constitutes an implicit


57

delegation of interpretive authority to an agency, Chevron, U.S.A., Inc. v. Natural

Resources Defense Council, Inc., 467 U.S. 837, 844 (1984)—to hold that the

degree of deference somehow turns on how closely the agency hews to the parties’

litigating positions.10

III. Application of the Commission’s interpretation of Section 17(a)(3) does not contravene principles of fair notice or the rule of lenity.

A. Flannery did not lack fair notice of Section 17(a)(3)’s prohibitions.

Flannery contends that “applying the Commission’s interpretation to [him]

would violate his due process right to fair notice,” because his conduct occurred

before the Commission clarified the scope of liability under Section 17(a)(3).

FlanneryBr.60, 63-65. That argument also fails.

The “fair notice” doctrine forecloses agency action only in the “very limited

set of cases” where the agency’s interpretation is “so far from a reasonable

person’s understanding of the [statute] that [it] could not have fairly informed [the

person] of the agency’s perspective.” Suburban Air Freight, Inc. v. TSA, 716 F.3d

679, 684 (D.C. Cir. 2013) (internal quotation marks omitted). Here, the

Commission’s interpretation of Section 17(a)(3) is not “so far from” what a

reasonable person might expect the statute to mean that, as Flannery claims

10 This Court’s decision in SEC v. Tambone is not to the contrary. 597 F.3d 436, 449 (1st Cir. 2010). There, the Court declined to defer to the Commission’s position because, in that case—in contrast to the present one— the Commission’s position was developed in litigation, not through a formal adjudicative process. Id.


58

(Br.63), “nobody was on notice” that the Commission would read the provision to

encompass misleading misrepresentations and omissions. As discussed above, the

Commission’s interpretation is driven primarily by the literal text of the statute. It

seems improbable, to say the least, that “a reasonable person” would not have

expected the statute to be read literally. Moreover, over the past two decades,

multiple courts and Commission decisions have held that misstatement-related

conduct may give rise to liability under Section 17(a)(3).11

Therefore, even if “the outer contours of liability under Section 17(a)(3)”

were—and remain—unclear, Anthony Fields, Securities Act Release No. 9727,

2015 WL 728005, at *10-11 (Feb. 20, 2015), it is not the case that the provision’s

application to Flannery’s conduct was (or is) unclear. Flannery, a 30-year veteran

of the securities industry (FlanneryBr.65) should have appreciated that repeatedly

11 For judicial decisions, see, e.g., Weiss v. SEC, 468 F.3d 849, 855 (D.C. Cir. 2006) (misrepresentations in documents sent to prospective investors); SEC v. Seghers, No. 04-cv-1320, 2006 WL 2661138, at *3 (N.D. Tex. Sept. 14, 2006) (misleading letters to investors), aff'd in relevant part, 298 F. App’x 319 (5th Cir. 2008); SEC v. Melchior, No. 90-c-1024J, 1993 WL 89141, at *16, 21 (D. Utah Jan. 14, 1993) (same); see also SEC v. Banc of Am. Mortg. Sec., Inc., No. 13-cv-00447, 2014 WL 2778498, at *4 (W.D.N.C. June 19, 2014) (slip op.); Goldsworthy, 2008 WL 8901272, at *8. For Commission decisions, see, e.g., Johnny Clifton, Securities Act Release No. 9417, 2013 WL 3487076, at *10 (July 12, 2013) (misleading “misrepresentations and omissions” in investor communications); Piper Capital Mgmt., Inc., 56 S.E.C. 1033, 2003 WL 22016298, at *9 (Aug. 26, 2003) (“participation” in “materially misleading disclosure” documents); Byron G. Borgardt, 56 S.E.C. 999, 2003 WL 22016313, at *13 (Aug. 25, 2003) (omissions in registration statements); Nat’l P’ship Invs. Corp., Securities Act Release No. 7425, 1997 WL 349021, at *5–6 (June 25, 1997) (misleading statements in public filings).


59

editing, drafting, and approving misleading letters to investors would fall squarely

within Section 17(a)(3)’s prohibition on “course[s] of business” that operate as a

fraud upon investors. As the Supreme Court has advised, where a statute’s

prohibitions “are set out in terms that the ordinary person exercising ordinary

common sense can sufficiently understand and comply with,” and the conduct at

issue “falls squarely within the ‘hard core’ of the statute’s proscriptions,” it is no

defense that “the outermost boundaries of [the statute] may be imprecise.”

Broadrick v. Oklahoma, 413 U.S. 601, 608 (1973).

The authority Flannery cites in support of his fair notice claim also is

inapposite here, where the Commission’s opinion is consistent with its past

pronouncements and follows directly from the statutory text. This case therefore is

unlike FCC v. Fox Television Stations, Inc., in which the FCC impermissibly

“changed course” and significantly altered what it deemed to be the “key

consideration[s]” for establishing statutory violations. 132 S. Ct. 2307, 2317-18

(2012). This case is also distinguishable from Upton v. SEC, where, after years of

minimal enforcement of one of its rules, the Commission made “a substantial

change in its enforcement policy,” broadly construing the rule to prohibit conduct

that actually complied with its literal language. 75 F.3d 92, 97-98 (2d Cir. 1996).


60

B. The rule of lenity is inapplicable.

Flannery and the Chamber argue erroneously that because Section 17(a)(3)

may be used as the basis for both civil and criminal liability (15 U.S.C. § 77x), the

rule of lenity requires that that it be read to exclude any misstatement-related

conduct. FlanneryBr.62-63; ChamberBr.13-21. As this Court has explained, “the

rule of lenity is rarely applied, and should be reserved for situations in which,

‘after considering text, structure, history, and purpose, there remains a grievous

ambiguity or uncertainty in the statute such that the Court must simply guess as to

what Congress intended.’” United States v. Fernandez, 722 F.3d 1, 26 n.15 (1st

Cir. 2013) (quoting Barber v. Thomas, 560 U.S. 474, 488 (2010)). “The simple

existence of some statutory ambiguity . . . is not sufficient to warrant application of

[the rule], for most statutes are ambiguous to some degree.” Muscarello v. United

States, 524 U.S. 125, 138–39 (1998) (emphasis added); United States v. Jimenez,

507 F.3d 13, 20-21 (1st Cir. 2007).

Here, to the extent Section 17(a)(3) is ambiguous—and remains so after

considering the statute’s “context, structure, history, and purpose,” Abramski v.

United States, 134 S. Ct. 2259, 2272 n.10 (2014)—such ambiguity is certainly not

“grievous.” Tellingly, neither Flannery nor the Chamber asserts that it is. See

FlanneryBr.62-63; ChamberBr.13-21. Their argument must be, therefore, that—as

others before them have unsuccessfully claimed—the rule applies “because it [i]s


61

possible to articulate a construction more narrow than that urged by the

Government.” See Soto-Hernandez v. Holder, 729 F.3d 1, 6 (1st Cir. 2013)

(quoting Moskal v. United States, 498 U.S. 103, 108 (1990)). But that argument

fails; as noted above, the Supreme Court has “repeatedly emphasized that is not the

appropriate test.” Abramski, 134 S. Ct. at 2272 n.10. Moreover, even if one were

to find some meaningful ambiguity in the statute, generally, it certainly is not

ambiguous as to Flannery; as discussed, his conduct falls squarely within the

heartland of its prohibitions. Surely, as an experienced securities professional,

Flannery could not have reasonably believed that it was permissible to disseminate

misstatements to investors. The rule of lenity is therefore simply inapposite in this

case.

The Chamber nevertheless endeavors to set up a conflict between principles

of administrative deference and the rule of lenity, arguing that lenity must always

trump deference to an agency’s interpretation of a statute. ChamberBr.13-21. But

this Court has rejected the Chamber’s position, holding that when a statute is

ambiguous, it is appropriate to first defer to the agency interpretation before

determining whether resort to the rule of lenity is required. Perez-Olivo v. Chavez,

394 F.3d 45, 53 (1st Cir. 2005) (“[T]he rule of lenity does not foreclose deference

to an administrative agency’s reasonable interpretation of a statute.”); Soto-

Hernandez, 729 F.3d at 6 (“Especially in light of the deference owed to the BIA’s


62

constructions of [the statute], the rule of lenity cannot apply to contravene the

BIA’s reasonable interpretation in this case.”). And, in any event, the conflict the

Chamber attempts to create is illusory here, where Section 17(a)(3) is not

“grievous[ly]” ambiguous, and thus the rule of lenity is inapplicable. Accordingly,

even if one were to accept the Chamber’s argument, deference to the

Commission’s reasonable interpretation of Section 17(a)(3) is still appropriate

here.

IV. The Commission properly exercised its discretion when sanctioning Flannery.

“A sanctions order of the Commission must be upheld unless the order is a

gross abuse of discretion.” Rizek v. SEC, 215 F.3d 157, 160 (1st Cir. 2000)

(internal quotation marks omitted). Because the “appropriate remedy is ‘peculiarly

a matter for administrative competence,’” id., “[c]onsiderable deference should be

given the Commission’s ultimate judgment about what will best protect the

public,” id. at 161 (internal quotation marks omitted). “As a result, the

Commission’s sanctions must be affirmed unless unwarranted in law or . . .

without justification in fact.” Id. at 160 (internal quotation marks omitted).

Here, the Commission appropriately exercised its discretion when it

determined to impose a one-year suspension, a cease-and-desist order, and a

$6,500 penalty on Flannery. See ADD109-16. In making that determination, the

Commission did not “fail[] to explain how” the applicable factors supported those


63

sanctions, nor did it erroneously apply the factors, as Flannery suggests.

FlanneryBr.65. To the contrary, as sort forth in detail in its opinion, the

Commission specifically considered, and appropriately applied, each of the

applicable guiding factors. ADD109-16.

Flannery notes his “impeccable 30-year career in the industry,” his “sterling

character,” and “the age of the conduct.” FlanneryBr.65. But the Commission

accounted for these factors when determining to impose only a “lenient” one-year

suspension and the minimum statutory penalty. ADD111-16. And, aside from his

disagreement with the Commission’s assessment of the seriousness of his

misconduct and the risk of future violations, Flannery identifies no other purported

errors in the Commission’s analysis. As a result, he fails to demonstrate that the

Commission abused its discretion when sanctioning him.

CONCLUSION

For the foregoing reasons, the Commission’s order should be affirmed.


64

Respectfully submitted, MICHAEL A. CONLEY Deputy General Counsel

JOHN W. AVERY Deputy Solicitor

BENJAMIN L. SCHIFFRIN Senior Litigation Counsel

/s/ Lisa K. Helvin LISA K. HELVIN Senior Counsel

Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549-9040

(202) 551-5195 (Helvin) [email protected]

July 15, 2015


CERTIFICATE OF COMPLIANCE

I certify that this brief complies with the type-volume limitation set forth in

Federal Rule of Appellate Procedure 32(a)(7)(B) because, according to the word

processing program with which it was prepared (Word 2010), the brief contains

13,980 words, excluding the parts of the brief exempted by Federal Rule of

Appellate Procedure 32(a)(7)(B)(iii).

I also certify that this brief complies with the typeface and type-style

requirements of Federal Rule of Appellate Procedure 32(a)(5) and (6) because it

uses a proportionally spaced, 14-point typeface.

/s/ Lisa K. Helvin LISA K. HELVIN Senior Counsel Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549-9040 (202) 551-5195 [email protected]

July 15, 2015


CERTIFICATE OF SERVICE

I certify that on July 15, 2015, I electronically filed the foregoing Brief of

the Securities and Exchange Commission, Respondent, using the Court’s CM/ECF

system, and that the following counsel of record will be served by the Court’s

CM/ECF system:

Mark W. Pearlstein Fredric D. Firestone Laura McLane David H. Chen (for Petitioner John P. Flannery) John F. Sylvia Andrew N. Nathanson Jessica C. Sergi (for Petitioner James D. Hopkins) Kate Comerford Todd Steven P. Lehotsky Jonathan G. Cedarbaum Christopher Davies Daniel Aguilar John Byrnes (for Amicus Curiae The Chamber of Commerce of the United States of America)

/s/ Lisa K. Helvin Lisa K. Helvin Senior Counsel Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549-9040 (202) 551-5195 [email protected]


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